It’s time to rethink financial planning and analysis
The business and human impacts of the COVID-19 pandemic demand a new approach to managing complexity now. Dealing with a rapidly evolving planning environment is next. An integrated, end-to-end plan to simulate operating scenarios within a financial model plan can connect all elements of the business. These include workforce, sales and revenue, costs such as indirect costs, selling, general and administrative (SG&A) expenses and cost of goods sold, and working capital.
Many companies have found that their older plans have become irrelevant. In a six-week period from early March to mid-April, 295 companies withdrew their annual guidance1.
To adjust to new realities, planning should shift to “real-time,” using scenario modeling techniques and rapid simulation to adjust controllable and non-controllable variables. These scenarios should leverage internal and external data to create “what-if” hypotheses that can be shared with executive leadership to determine a most likely path forward, using experience and intuition as the final determining factor.
The four key steps in getting the planning process right are:
A large media company’s new CFO together with the finance, planning and accounting team leveraged SAP Analytics Cloud to complete new interactive scenario-based discussion of the long-term plan with the board of directors.
The base case plan and key planning organic and inorganic mergers and acquisition growth scenarios were set up so that input variables (such as macro-economic indicators, cash flow and allocations) could be adjusted in real time, based on feedback from the board. This allowed the board to immediately visualize impact upon a set of output KPIs including revenue and expense growth rates, EBITDA and margins, adjusted earnings per share, share price, market capitalization, price/earnings ratio and leverage ratios.
This new scenario-based process accelerated the alignment among the board, the C-Suite and the business unit leaders on the long-term strategic plan and prioritized investment decisions.
Dealing with certain uncertainty
While economic conditions may improve over time, some things are likely to change permanently. Many aspects of doing business – from managing customer and supplier relationships to maintaining adequate levels of liquidity to predicting levels of demand – may be very different from the way they were pre-crisis. Old ways of financial planning, forecasting and analysis may disappear as well. The scenario planning process can help companies identify opportunities and can serve as a guide to outmaneuvering this certain uncertainty.